Centre revamps stake sale process for PSUs

The government is set to try a new approach to stake sales in state-owned companies from early 2015-16, having learnt lessons from past failures to achieve disinvestment targets.

The new process starts with a multi-year rolling disinvestment list that will rely on cutting the time taken in regulatory processes to ensure market bears do not bring down the share prices of public sector undertakings (PSUs) up for divestment.

Additionally, unlike the usual practice of starting stake sales in the second half of any financial year, the plan envisages year-round issues hitting the market.

Business Standard has learnt the finance ministry’s department of disinvestment (DoD) has in its new rolling list included almost all PSUs, among them those in which the government’s stakes need to be brought down to 75 per cent in the next two-and-a-half years. This was mandated by the Securities and Exchange Board of India (Sebi) in its June board meeting this year.

While yearly targets for disinvestment will likely be set in the Budget as usual, the DoD will choose from a basket of companies to meet them based on market conditions and ease of regulatory approvals.

At current prices, the government can raise close to Rs 60,000 crore if it brings down its stake to 75 per cent in around 20 listed PSUs. First off the blocks, as early as May next year, would be companies in which the Centre’s stake could be brought down to 75 per cent with a 5-10 per cent stake sale, sources said.

“We are first looking to divest companies in which the public shareholding can be taken up to 25 per cent in one tranche. After that we will look at companies that require multiple tranches to bring down the Centre’s stake to 75 per cent,” said a senior government official who did not wish to be named.

Some of the big public sector companies in which the government holds more than 75 per cent stakes include Coal India, National Aluminium, NHPC, NMDC, Indian Tourism Development Corporation, MMTC and National Fertilizers. Although Coal India and NHPC are part of the roadmap for 2014-15 and may be divested by January, the Centre will have to go in for another five per cent stake sale in the former after a 10 per cent divestment brings down its shareholding to 80 per cent.

Some PSUs like HMT and Scooters India are making losses and thus are candidates for complete divestment or winding up. However, officials did not speak on this issue and said it was a separate matter being examined by the department of public enterprises.

A major issue that the DoD has faced this fiscal year is that once disinvestment in any PSU becomes public knowledge, either after Cabinet approval or once the requests for proposal (RFPs) for merchant bankers are issued, investors start selling its shares in order to pick up fresh stake issued by the Centre later at a cheaper price. Investors usually have three-four months or more to bring down the prices as that is how long it takes the government to select merchant bankers, conduct roadshows, receive approvals, and hit the market.

To counter this, the DoD will take blanket Cabinet approvals, even for companies whose stake sales may be more than a year down the line. Sources said the whole process, starting with selecting merchant bankers and ending with a stake sale, might be compressed into just a month.

“If the government and the company in question provide enough manpower, the roadshows can be completed in a week. That is what the DoD is planning,” a second official said. He added the DoD would not announce the companies’ names beforehand and each proposed stake sale would become public only when the department put up RFPs on its website.

The aim, according to officials, is to give stock market bears as little time to react as possible.

For 2014-15, the Centre had budgeted raising around Rs 36,000 crore from stake sales in 10 PSUs, at least Rs 15,000 crore from residual stake sales in Hindustan Zinc and Balco, and about Rs 6,500 crore from selling part of the Rs 56,000 crore combined stake it holds in Axis Bank, Larsen & Toubro and ITC through Specified Undertaking of UTI (SUUTI).

It was an ambitious plan that began to unravel as soon as the PSU stocks started being hammered down by investors. Only one company, SAIL, has been divested so far this year, and while selling stakes in three other big companies, NHPC, Coal India and ONGC, will be enough for the Centre to meet its PSU divestment target, there is still uncertainty over some smaller companies planned for this year, including REC, PFC, and MOIL.

It is now clear the planned residual stake sales in Hindustan Zinc and Balco have been scrapped for now owing to legal complications and a delay in valuation of the stakes held by the government in the two companies. Also, the planned exchange-traded fund (ETF) through which the finance ministry was planning to sell the SUUTI entities is on the backburner.

The mid-year economic analysis has stated that tax revenues could fall short by as much as Rs 1.05 lakh crore. Thus the only way Finance Minister Arun Jaitley can meet the fiscal deficit target of 4.1 per cent of the gross domestic product is by cutting spending and ensuring that disinvestment, spectrum sales and PSU dividend proceeds exceed budget targets. With just one quarter remaining, for disinvestment at least, that looks unattainable.